Real Estate when done properly should be treated as a business. You have to have the right business process in place. The right financing, accounting, rent collection, estimates and due diligence.
Do not get involved in Real Estate without knowing too much about it. On the other side if you have a good Real Estate portfolio and practice good business you can improve your life through passive income and peace of mind. Today we will discuss two ways in which you can fund your Real Estate Transactions.
Finance It Yourself
There are various ways to do this. One way would be to buy the property outright. You can buy and hold … meaning rent it out or fix and flip it depending on what you want to do.
The negative to funding 100% is that there isn’t a lot of leverage in there. If you are buying with 100% cash and you have to carry the property longer than expected all your investment is tied up in this transaction. The return on investment on 100% financing is really low.
Most people do not buy a home with 100% of their money. They usually go to the bank which means leveraging or using another party. You get a mortgage and put down usually about 20%. Then as you get a return on investment you get a much higher yield.
For example: If you purchase a home for $100,000 and you put down 20%. Let’s say your rent minus all your expenses you are getting $200.00 a month. That is $2,400 on your $20,000 on your investment, which is a pretty good return on your Investment. So this would be for when you are doing it yourself with your own money, which can come from any sources. It can come from your savings, credit cards, LEIRA or RRSP funds. It is really about you coming down with your down payment.
Partnering with someone else
This means you might enter into something called a Joint Venture. This person would be very active or passive in the venture An active Investor is one which would be very involved in the entire process of the Investment.
Depending on the level of your experience in Investing you may be able to find other Joint Venture partners that won’t necessarily need to do that level of due diligence. If you are just starting out people won’t know who you are so you might have to allow for that level of active investor in your purchase.
It can be difficult in working with an active Investor which can lead to deals falling apart. This can happen if the active investor doesn’t know much about the Investing and they are making recommendations on things that they shouldn’t be involved in or know little about.
On the other hand if you are partnering with an active Investor who is an expert or is in the trades and understands Real Estate Investing but doesn’t have the time but you do this would be a great Partnership. So you put in the time and she/he puts in the Funds and expertise and she/he wants to make sure that the work gets done. At the end of it you both split the profit or whatever the profit sharing is agreed to at the beginning.
There is also a passive investor which doesn’t want to be involved in the transaction. So they give you the funds or purchase the home through their own down payment. You come in and manage the work … and again I am basing this on either a Rental or Fix or Flip.
A good passive investor would be someone looking for a long term passive income. For example, you go out and buy a 1 million dollar apartment building, the Investor has $300,000.00 he wants to invest. You go out and do the due diligence, you find the property that will cash flow with $300,000.00 down. The passive investor puts up the money and you put all the management and the up-front work, meaning to find the property and find all the tenants. Whatever the cash flow is you both split that or whatever the arrangement was between the two of you.
When you are looking to fund a property you have to look at how much money you have, how much experience you have and how could you find someone to partner with you. I understand when starting out it can be difficult but it’s all in the presentation. It’s learning how to sell and being confident in approaching all these activities.